MANAGEMENT REPORT on the Activities of the ELEKTROBUDOWA SA GROUP

Transcription

1 MANAGEMENT REPORT on the Activities of the ELEKTROBUDOWA SA GROUP for the six months ended 30 June 2013

2 Index to the Report on the Activities 1. STRUCTURE OF THE ELEKTROBUDOWA SA GROUP The Parent, ELEKTROBUDOWA SA A subsidiary KONIP Sp. z o.o. (Ltd) A subsidiary - ENERGOTEST sp. z o.o A subsidiary - ELEKTROBUDOWA UKRAINE Ltd An associate - KRUELTA Ltd An associate the Electrotechnical Company VECTOR Ltd An associate - SAUDI ELEKTROBUDOWA LLC PRESENT AND ANTICIPATED FINANCIAL POSITION. KEY ECONOMIC AND FINANCIAL FIGURES Sales Revenues - Principal Products and Services Financial result and basic factors or untypical events which impact its amount Financial analysis Financial resources management Human capital management Occupational Health and Safety Management Quality System Management Prospects for business development of the ELEKTROBUDOWA SA group and significant risks or threats MARKET SITUATION - SALES AND PROCUREMENT Sales destinations Dependence on one or more customers Sources of supply SIGNIFICANT AGREEMENTS Construction contracts and contracts for supply of goods Insurance contracts INVESTMENTS Investments carried out in H Investment plan for the second half of RELATED PARTY TRANSACTIONS INFORMATION ON CREDITS, LOANS, SECURITIES AND GUARANTEES Credit contracts as at 30 June Other loan agreements Guarantees and Sureties PERFORMANCE AND THE PUBLISHED FORECAST FOR BASIS FOR PREPARATION

3 10. MAJOR TECHNICAL DEVELOPMENT WORKS STATEMENT ON CHOICE OF AN AUDITOR SHAREHOLDERS OF THE PARENT ELEKTROBUDOWA SA INFORMATION ABOUT THE MANAGEMENT BOARD AND THE SUPERVISORY BOARD OF THE PARENT The Management Board of the parent The Supervisory Board of the Parent The Audit Committee and the Nominating and Remuneration Committee of the parent The Audit Committee of the Parent The Nominating and Remuneration Committee of the parent STATEMENT ON OBSERVING THE CORPORATE GOVERNANCE RULES BY THE PARENT SIGNIFICANT EVENTS CONCERNING PRIOR YEARS, RECOGNISED IN THE FINANCIAL STATEMENTS FOR THE CURRENT PERIOD SIGNIFICANT EVENTS AFTER THE BALANCE SHEET DATE STATEMENT OF CONFORMITY WITH LEGISLATION

4 1. STRUCTURE OF THE ELEKTROBUDOWA SA GROUP 1.1 The Parent, ELEKTROBUDOWA SA ELEKTROBUDOWA SA with registered office in Katowice, at 12 Porcelanowa Street, Katowice is a joint stock company established and operating according to the Polish law. The company is registered in the National Court Register (KRS) in the District Court Katowice-Wschód in Katowice, 8th Business Department under KRS entry no Principal activity of the Company according to the Polish Classification of Activities (PKD 4321Z) is executing of electrical installations in buildings and structures. A sector according to the Warsaw Stock Exchange classification: construction. The business activity of ELEKTROBUDOWA SA includes: comprehensive electrical installation works in newly built, extended and modernized power plants and industrial facilities; supply of electric power equipment, mainly the electricity transmission and distribution equipment; design engineering, testing, commissioning and start-up of electrical installations. ELEKTROBUDOWA SA is an enterprise consisting of several divisions, including the Head Office and three production divisions which are not subject to disclosure in the National Court Register: - Power Generation Division (RWE) Its organisational units are located partly in Katowice at 12, Porcelanowa Street and in Jaworzno at 51, Promienna Street. The Power Generation Division conducts its operations on the whole territory of Poland and also in other countries. The domestic operations of the Division are carried out by organised, permanent facilities, located in Tychy, Opole, Kozienice, Bełchatów, Rybnik and Częstochowa. The Power Generation Division also registred its facilities (branches) outside Poland, through which it conducts its business in Finland and Luxembourg. The permanent establishment in Finland was registered on 19 March 2008 under number of the Commercial Register maintained by the National Board of Patents and Registration of Finland, Helsinki. The registration address is: TVO Olkiluoto 3, Construction Site f, EURAJOKI. Tax Identification Number NIP: FI The branch still exists in operation. The establishment in Luxembourg was registered in the Trade and Companies Register in Luxembourg on 21 December 2010 under the number B157469,at the address: 41, Boulevard Prince Henri, L-1724 Luxembourg. The entry is in force for indefinite time. NIP: LU Elektrobudowa s business in Estonia was registered by the Northern Tax and Duty Centre, registration code The branch in Estonia has had the status of a tax payer since 16 3

5 August 2011, tax registration number EE The address of the establishment: Roosikrantsi 2, Tallin, Estonia. In April 2012 ELEKTROBUDOWA SA registered a permanent establishment in Germany in Tax Office Oranienburg under number 053/657/ Since 15 May 2012 the Establishment has had the Tax Number DE The registered address of the branch is Straße des 17 Juni 106, Berlin. A branch in the Netherlands was entered in the Register of Businesses of the Dutch Chamber of Commerce on 1 October 2012 under number with the registration address Synerieweg 1, 9979XD Eemshaven. Postal address of the establishment is Postbus 1170, 2260BD Leidschendam, its VAT registration number NL Industry Division (RP) Organisational units of the Division are located partly in Katowice at 12, Porcelanowa Street and in Płock at 42, Zglenickiego Street. The Industry Division carries out its operations on the whole territory of Poland, through its organised, permanent facilities, generally in Płock, Katowice, Warsaw, Konin and Gdańsk. - Power Distribution Division (RDE) The production facility and administration units of the Division are located in Konin at 156, Przemysłowa Street. The Power Distribution Division conducts business in Poland through its organised, permanent facilities in Konin, Wrocław and Katowice. A significant part of products manufactured by the Division is sold to foreign markets. 1.2 A subsidiary KONIP Sp. z o.o. (Ltd) with its registered office at 12, Porcelanowa Str., Katowice. ELEKTROBUDOWA SA holds a 100% stake in KONIP Sp. z o.o. representing 100% of the company s equity. KONIP Sp. z o.o. administers the real property owned by or in perpetual usufruct of ELEKTROBUDOWA SA. The scope of their business particularly includes maintenance and administration of building and structures, renting the useful areas, fire protection services, cleaning the rooms and area as well as property protection, providing telecommunication services, maintaining the parent s archives and the reception service. 1.3 A subsidiary - ENERGOTEST sp. z o.o. The company has its registered office in Gliwice, 44 B Chorzowska Str., Gliwice. ELEKTROBUDOWA SA holds 100% share in the equity of the company, representing 100% votes in the General Meeting of Shareholders. Basic activity of ENERGOTEST comprises services related to construction, modernization and operation of power generating facilities, production of data processing devices, electrical switching and 4

6 control devices, installation, repairs and maintenance of switchgear and controlgear, also tests and technical surveys A subsidiary - ELEKTROBUDOWA UKRAINE Ltd. The company has its registered office in Sevastopol, in General Petrov Street, Bldg 20 office 7, 9901 Sevastopol, Ukraine. ELEKTROBUDOWA SA holds a 62% stake in ELEKTROBUDOWA UKRAINE Ltd. The objects of ELEKTROBUDOWA UKRAINE Ltd. comprise selling of high, medium and low voltage electrical systems, including switchgear panels and distribution substations, in the Ukrainian market, assembly of electrical equipment, switching and control devices, maintenance and repairs of electrical distribution and control devices. 1.5 An associate - KRUELTA Ltd. The company has its with its registered office at 17A, Magnitogorska Street, St Petersburg, the Russian Federation. As at 30 June 2013 ELEKTROBUDOWA SA held 49% shares of KRUELTA s representing 49% of its equity and has significant influence on the associate s financial and economic policies. Principal business of KRUELTA is the assembly and selling of medium voltage switchgear systems in the Russian market. This offer is complemented with low voltage switchgear and mobile containerized substations. On 5 April 2012 the General Meeting of Partners of the limited liability company KRUELTA adopted a unanimous resolution to wind up the company KRUELTA Ltd. The General Meeting approved the procedure and date of liquidation in accordance with the applicable laws of the Russian Federation and authorized the liquidator to take any necessary actions relating to winding up. In the opinion of the Management of the parent, the decision to liquidate KRUELTA Ltd. does not have impact on the scope of business activity of the group. Ordinary activities of the limited liability company KRUELTA has been easily transferred to KRUELTA, a branch of the Power Equipment Production Plant VECTOR Ltd. The branch KRUELTA not only has taken over the market of customers of KRUELTA Ltd. but also purchased its fixed assets and employed its skilled and experienced staff in order to provide the base for the acquired area of operations and ensure undeteriorated conditions for business continuation. 1.6 An associate the Electrotechnical Company VECTOR Ltd. The company has its registered office in Votkinsk, at 2, Pobiedy Str., the Autonomic Republic of Udmurtia of the Russian Federation. ELEKTROBUDOWA SA holds 49% of VECTOR s capital. At 30 June 2013 the percentage of ELEKTROBUDOWA s stake in the equity of VECTOR was equal to the percentage of voting rights in its General Meeting of Shareholders. ELEKTROBUDOWA SA has significant influence on the associate s financial and economic policies. 5

7 Principal business activity of VECTOR comprises manufacturing of electrical and radio components, parts for electrical vacuum devices, and also providing construction works and wholesale of electrical production facilities, including communication devices. KRUELTA, a branch of the Power Equipment Production Plant VECTOR Ltd., registered at 20 A, Repishcheva Street, Sankt Petersburg, the Russian Federation continues ordinary activities of the liquidated KRUELTA Ltd., focusing on the assembly and sales of the medium voltage switchgear for the Russian market. The sales offer of KRUELTA branch includes also low voltage switchgear and mobile transformer and distribution stations. 1.7 An associate - SAUDI ELEKTROBUDOWA LLC The company has its registered office in Riyadh, Al. Sittin, P.O. Box Riyadh, the Kingdom of Saudi Arabia. At 30 June 2013 ELEKTROBUDOWA SA held 33% of shares which represent 33% of the share capital of SAUDI ELEKTROBUDOWA, equal to the percentage of voting rights in the General Meeting of Shareholders. ELEKTROBUDOWA SA has significant influence on the associate s financial and economic policies. Business scope of SAUDI ELEKTROBUDOWA includes offering low, medium and high voltage electrical systems, including switchgear and distribution panels and electrical substations as well as installation, repair and maintenance services for energy control and distribution systems. 2. PRESENT AND ANTICIPATED FINANCIAL POSITION. KEY ECONOMIC AND FINANCIAL FIGURES 2.1 Sales Revenues - Principal Products and Services The revenues from sales of goods, services and materials of ELEKTROBUDOWA SA group generated in H amounted to thousand PLN. Major part of sales revenues was generated by the basic operations of the group, that is electrical installation services. The revenue amounted to thousand PLN, which was 72.2% of total sales of the group. The H sales dropped by thousand PLN compared to H1 2012, which is the decrease by 13.2% on last year s. The first half of 2013 is another fiscal year when the ELEKTROBUDOWA SA group recorded further increase in export sales, which also includes supplies of goods and services within the EU. Export sales amounted to thousand PLN and were by 7.5% higher than in H The group intensified its activity in the existing markets, where the growth of exportes concerned mainly the supply of products and other services to Turkey, the Saudi Arabia and France, and the construction and erection services to Finland and Germany. The group treats as priority all actions aimed at boosting its competitiveness in the foreign markets and increasing exports. The new trade areas included the Republic of South Africa (sale of finished 6

8 products), Greece (sale of finished products and other services) and Kazakhstan (sale of goods and erection services). Plans include selling to Brazil. The table below presents the structure of net revenue from the sales of products, goods and materials in H and H H H Change PLN 000 % PLN 000 % PLN 000 Revenue from sales of products, merchandise and materials (58 377) construction and erection services (58 294) electro-technical products other services materials (448) The ELEKTROBUDOWA SA group specializes in providing electric installation services and in manufacturing of equipment used for transmission and distribution of electric energy. Sales volume of this equipment in H was comparable to that of H Sales of electricity transmission and distribution equipment accounted for 24.7% of total H sales revenue. A substantial part of the products, through internal sales, is transformed to external sales within provided installation services. Maintaining the position of a leading supplier of medium-voltage switchgear on the Polish market is one of the key strategic goals of the group. In H the group sold industrial products for the sum of thousand PLN. In this amount thousand PLN fell to internal sales realised by the erection units, whereas direct (external) sales reached the value of thousand PLN. The presented sales volumes of finished goods account for consolidation exclusions within the group. Production of principal products by volume and value in H and H was as follows: - by volume: Type of Product Quantity Unit of measure H H Medium voltage switchgear panel Low voltage switchgear panel Mobile substations set MV busducts type NGW-M, PONTIS set High-current busducts type ELPO, ELPE, PELPO set Cable trays ton 18 9 Electricity distribution and control devices pcs Measuring and monitoring devices (recorders) pcs Peripheral devices (separators, converters, controllers) pcs

9 - By value H H Product Value (%) Value (%) (PLN 000) (PLN 000) Medium voltage switchgear Low voltage switchgear Mobile substations MV busducts type NGW-M, PONTIS High-current busducts type ELPO, ELPE, PELPO Cable trays Semi-finished products for switchgear and mobile substations Electricity distribution and control devices Measuring and monitoring devices (recorders) Peripheral devices (separators, converters, controllers) Other products Total Financial result and basic factors or untypical events which impact its amount Since the beginning of 2011 the economic conditions in the construction industry have been deteriorating. In December 2012 the economic climate indicator reached minus 35. Business index in the 1st quarter of 2013 dropped by 13 points compared with the previous quarter. In the second quarter of 2013 it rose by 45 points compared with the previous quarter. Its growth in Q2 on Q1 results from seasonality of construction industry and should not be considered as sustained growth trend. In June 2013 the economic climate indicator reached minus 17 and there are no indications of improvement of the situation of building companies. Forecasts for the economic climate of the building industry are still pessimistic. Insufficient demand, particularly of the public sector, became a significant factor which curbs the growth. Number of invitations to tender has dramatically decreased and less orders means less income. The problem of payment gridlocks is not becoming less serious. Within the past six months courts declared bankruptcy of 455 companies, 106 building companies turned bankrupt. The wave of bankruptcies and arrangement bankruptcies involves the necessity to make write-offs on receivables. In the first half of 2013 the group created provisions for impairment of receivables in the amount of thousand PLN. At 30 June 2013 the amount of the group s provisions for impairment of receivables totalled thousand PLN, which accounts for 7.9% of total amount of trade and other receivables. 8

10 Strong market competition within the sector still remains an important barrier which limits the activity of building industry, as it directly translates to lower margins. Winning new orders in tender procedures where the most-favourable-price bids are successful keep the profit margins on a low level. Furthermore, execution of awarded orders is bound with the building materials price risk, as price changes may have adverse influence on contract profitability. High indebtness of building companies, low margins achieved on the projects and still strong competition which will result on low profitability, also of new orders, are the main factors contributing to deterioration of the situation in the building industry. Major growth barriers, beside strong competition, still include high labour costs, high prices of building materials and bureaucracy. The increase in labour cost was related to the demand for experienced professionals and contracts carried out in other countries where terms of payment for the group s employees must conform to local regulations Increasing significance of the barrier relating to uncertainty of overall economic situation caused that the building companies forecasts of further growth have lowered and a drop of profitability of building output is expected. General business climate in the building industry in 2013 is reflected in the performance of the group. The economic and financial results of the reporting period closed with the 857 thousand PLN net profit which decreased compared to analysed periods. It dropped by thousand PLN compared to H and by thousand PLN compared to the H net profit. A decrease in net profit and gross profit for the period from January to June 2013 compared to the same period of the previous year was recorded by all business segments of the group. The net loss recognized in the Industry Division segment in H in the amount of thousand PLN was by thousand PLN lower than in the loss incurred in H Negative result of that segment substantially contributed to decreasing the level of the group s profitability. The service activity of the Industry Division segment concentrated principally in the building industry, which has been severely affected by the economic downturn for several years. In 2012, compared to 2011, the building industry output dropped by 0.6%, number of buildings decreased by 1.3% and specialist construction works by 0.7%. It is predicted that the value of the Polish construction output will continue to decline in In the period between January and June of the current year the construction output was by 21.5% lower than in the same period of the previous year. In the light of the described above economic situation in the building industry, further decrease of the volume of sales of the Industry Division segment may be expected. Volume of its order backlog is unfavourable and the forecasts for the coming months are not optimistic. At 30 June 2013 the bakclog of orders of the Industry Division amounted to thousand PLN, while a year before it had the value of thousand PLN (a drop by 22.5%). The period that the Industry Division segment has to wait for payment for the provided works or services is systematically prolonging. The declared bankruptcies and arrangement bankruptcies involve the necissity to write off some of the receivables.the amount of impairment of receivables 9

11 created by the Industry Division in H was of thousand PLN which accounts for 68.9 per cent of their total. At 30 June 2013 the value of provision for impairment of receivables of the Industry Division amounted to thousand PLN and constituted 56.6% of total. The most serious decline in profits, both gross and net, was suffered by the Industry Division business segment of the group. Financial performance of the segment had substantially contributed to the reduction of the group s profitability level. High indebtness of building companies which causes oayment gridlocks, low margins achieved on the projects and maintaining strong competition which impose unfavourable terms of contracts, are the main factors contributing to the negative financial result of the Industry Division segment. The net loss incurred by the segment in H in the amount of thousand PLN includes the expected losses on services performed under contracts in the amount of thousand PLN. The priorities of the coming months include further improvement of business efficiency and operational effectiveness, improvement of project management process and optimization of purchase processes within the group. The strengths that at present help the companies to operate in the Polish construction market are: reliability, professionalism, good track record and references, experience. In the time of slowdown in the economy, business contacts, so stable, good relations with purchasers, investors and subcontractors are of particular value. The level of uncertainty in the market were the ELEKTROBUDOWA SA group operates is relatively high, therefore it is difficult to present reliable sales forecasts for a period longer than one year. Despite unfavourable economic climate of the building industry, the forecasts of the parent s backlog of orders for 2013 and the value of orders received in H ensure full implementation of the company s productive capacity in further quarters of the financial year. Total value of contracts, orders and purchase orders received by the parent in H amounted to million PLN which means an increase by 198.2% on the comparable period of the previous year. The parent s order backlog as at 30 June 2013 amounted to million PLN Compared to 30 June 2012 its volume rose by 102.0%. Forecasts concerning the volume of orders for the coming period are optimistic, both in respect to domestic and foreign orders. In H revenues on sales of products, goods and materials earned by the ELEKTROBUDOWA SA group amounted to million PLN and were by 58.4 million PLN lower than in H1 2012, which is equivalent to a 13.2% drop. The biggest contracts of the group were signed by the parent. The parent, ELEKTROBUDOWA SA generated 92.9% of total group s revenues, whereas the subsidiary, ENERGOTEST sp. z o.o. was responsible for 5.3% share, and ELEKTROBUDOWA Ukraine Ltd. for 1.8% share in the total group s revenues. 10

12 Sales invoiced in H were generated principally on big contracts for the supply of electrical installation services and supply of electrical equipment, such as: - supply of erection & precomissioning of electrical and I&C components and systems for NPP OLKILUOTO 3 in Finland PLN 60.4m - construction of SCR/EF installation, including infrastructure, Stage 1 for PKN ORLEN SA PLN 28.4m participation in the turnkey supply of a new, gas-fuelled, combined heat and power unit, 45MWe electric power and 40MWt thermal power in KGHM, Głogów for KGHM Polska Miedź S.A. PLN 25.5m supply of services related to site preparation for construction of the Flue Gas Desulfurization (FGD) plant within the framework of the project: Adjustment of the Heat & Power Plant in Płock to the Emmission Standards Applicable from 1 January 2016 Site Preparation for Construction of the FGD Plant for PKN ORLEN SA.. PLN 17.6m - Supply of equipment and erection of industrial and building electrical systems for STORA ENSO Narew Sp. z o.o. PLN 13.2m - Civil works and other services required for the completion of project - construction of the Franowo tramway depot in Poznań for Miejskie Przedsiębiorstwo Komunikacyjne w Poznaniu Sp. z o.o. PLN 12.8m - Modernization and maintenance of the control and supervision systems with electrical installations for units 7-12 in PGE elektrownia Bełchatów for Emmerson Process Management Power and Water Solutions Sp. z o.o. PLN 9.1m - Participation in the turnkey supply of a new, gas-fuelled, combined heat and power unit, 45MWe electric power and 40MWt thermal power in KGHM Polska Miedź S.A. Polkowice for KGHM Polska Miedź S.A. PLN 9.0m - design and build supply of the transformer % distribution station consisting of 6kV switchgear R6R and 0.4kV switchboard R4R in Elektrownia Rybnik S.A. forelektrownia Rybnik S.A. PLN 7.0m - turnkey site engineering and construction of the Integrated Communication Centre at Poznań Główny railway station for Poznań City Center I Sp. z o.o. PLN 6.6m 11

13 The main items of the statement of comprehensive income for H and H1 2012: H H Change PLN 000 % PLN 000 % PLN 000 Net sales revenues (58 377) Cost of products, goods and materials sold ( ) 95.8 ( ) Gross profit on sales Selling costs (2 316) 0.6 (3 678) Administration expenses (8 183) 2.1 (7 789) 1.8 (394) Other operating expenses (2 297) 0.6 (1 913) 0.4 (384) Other gains / losses - net (1 546) (3 707) Operating profit Finance income / costs net (493) (971) Share in profit of associates (1 882) Profit before income tax (2 400) Net profit for the period (2 881) Relations between sales and costs and their impact on the profit amount are described by sales profitability ratios. Values of those ratios reflect the ability of sales to generate earnings. The H profitability ratios dropped compared to the ratios obtained in H Gross profit margin fell by 0.5 percentage point on the same period of 2012, while the net profit margin dropped by 0.6 percentage point compared to H The decrease of profit margins was substantially caused by the growth of costs of other operating activity, which in its vast part consisted of impairment of receivables. Because of deteriorating financial situation of business partners, problems with liquidity and declared bankruptcies of a few co-operators, in H it was necessary to impair the receivables by million PLN. Impairment provisions created in the comparable period of the previous year amount to thousand PLN. Total amount of impairment of receivables of the group at 30 June 2013 was thousand PLN and was by thousand PLN higher compared to the amount in H Gross profit on sales after the six months of 2013 recorded a positive change and rose by thousand PLN, i.e. by 29.6%. By 1.3 percentage point higher rate of decline in costs of products, goods and materials sold than the rate of decline in sales revenue resulted in growth of gross profit margin on sales from the level of 2.9% to 4.2% in comparable periods. Selling costs in H amounted to thousand PLN and were by thousand PLN lower than in H The level of selling costs in consecutive years was correlated with the level of sales revenue. The share of selling costs in sales revenue was 0.6% in H and 0.8% in H The main item of the selling costs were transportation services, which dropped in the comparable periods by thousand PLN. 12

14 The general administrative costs incurred in H amounted to thousand PLN and rose by 394 thousand PLN, that is by 5.1%, compared to H In H the general administrative expenses had a 2.1% share in the sales revenue while in H the share was 1.8%. In recent reporting periods the share of administrative expenses in revenues did not significantly change. Other operating costs incurred by the group in H amounted to thousand PLN and included: - charges and fees paid for contract bonds issued by banks, thousand PLN, - bank commission on advanced loans, 360 thousand PLN, - legal fees and penalties, 259 thousand PLN. In H compared to H total value of charges and fees relating to the contract bonds rose by 563 thousand PLN (by 50.5%). This is due to bigger amount of guarantees provided by the group in H1 2013, including contract bonds: advance payment bonds, performance bonds, warranty bonds, and also provided as security for debt payment. At 30 June 2013 the amount of guarantees issued by banks totalled thousand PLN, while at 30 June 2012 it was thousand PLN. Also, costs of borrowings were greater by 119 thousand PLN (a growth by 49.4%). In H the parent used current account overdraft facility and a working capital loan to finance its day-to-day operations, what increased the amount of bank commission. The amount of loans utilized by the group in H totalled thousand PLN. In H the group s entities utilized the amount of thousand PLN of loans to fund their operations. The amount of utilized borrowings rose by thousand PLN in the analyzed periods. The expenses in respect to legal fees and penalties incurred by the group in H were by 53.5%, that is by 298 thousand PLN lower. Total other operating costs rose by 384 thousand PLN, that is by 20.1%. In H other expenses exceeded the amount of other income by thousand PLN, while in H there was a reverse situation: there was a surplus of other income over expenses in the amount of thousand PLN. Negative result of other operating activity in H was generally attributable to the impairment of receivables. Main items of other income: - interest thousand PLN - reversal of provision for impairment of receivables thousand PLN - penalties and compensation thousand PLN - positive exchange differences 646 thousand PLN - received compensation 634 thousand PLN - legal fees 174 thousand PLN - discount of receivables 89 thousand PLN - gains from disposal of financial assets 16 thousand PLN 13

15 Main items of other expenses: - provision for impairment of receivables thousand PLN - interest thousand PLN - damage repair cost 211 thousand PLN - donations 158 thousand PLN - inventories write-down 17 thousand PLN Operating profit generated by the group for H amounted to thousand PLN while return on operating profit was 0.5%. The profitability of operating activity rose 0.2 percentage point, compared to H The group recorded a 493 thousand PLN loss on financial activities, whereas in H it generated gains in the amount of 478 thousand PLN. The financial gains in the amount of 46 thousand PLN were received as dividend on the shares in Energotest diagnostyka Sp. z o.o. The gains were reduced by finance expenses incurred in the amount of 539 thousand PLN, of which: - interest on credit 521 thousand PLN, - interest on leases 18 thousand PLN. Gains from financial investment in shares of associates amounted to 213 thousand PLN in H and were by thousand PLN lower than in the same period of the previous year. The losses on other operating and financing activity had negative influence on the level of gross profit and net profit generated by the group. The pre-tax profit for H amounted to thousand PLN and was by thousand PLN, i.e. by 59.6% smaller than the profit generated by the group in H The amount of net profit earned in H was 857 thousand PLN and was by thousand PLN, i.e. 77.1%, lower than in H Financial analysis As at the end of H the group s balance sheet total rose by 23.3 million PLN compared to its value in the same period of the previous year. On the non-current assets side there was a drop by 0.3 million PLN, while the current assets rose by 23.6 million PLN. The decline in non-current assets was attributable to a significant, 11.9 million PLN decrease in the amount of non-current receivables. A growth was recorded in the following non-current assets items: intangible assets by 4.5 million PLN, deferred income tax assets by 3.0 million PLN and property, plant and equipment by 2.5 million PLN. In current assets items there was a growth in trade receivables by 50.0 million PLN, inventories by 4.8 million PLN and short-term prepayments by 3.0 million PLN. 14

16 On the equity and liabilities side, the relation of liabilities to equity increased. In H compared to the previous year, the increase in equity by 10.1 million PLN was accompanied by the 13.2 million PLN increase in liabilities. The growth in equity is principally attributed to the increase of supplementary capital by 13.2 million PLN further to distribution of profit for 2012 and prior years. The increase in liabilities was generally caused by the increase in loans, borrowings and debt securities by 22.8 million PLN, current accruals by 19.6 million PLN, payables to contractors for construction contract work by 7.4 million PLN, corporate income tax liabilities by 2.9 million PLN and other longterm payables by 2.6 million PLN. The group implemented the policy of financing its operations from its own funds, party supported by borrowed capital in the form of liabilities which was provisionally in its disposal, and also by overdraft facilities and working capital loan in the amount of thousand PLN. Selected ratios describing the company economic and financial position: I. Profitability ratios H H H Net profit margin 0.2% 0.9% 2.7% net profit / sales revenues 2. Gross profit margin 0.4% 0.9% 3.0% profit before taxes / sales revenues 3. operating profit margin 0.5% 0.3% 3.1% operating profit / sales revenues 4. Return on equity (ROE) 0.3% 1.2% 3.2% net profit / average equity capital 5. Return on assets (ROA) 0.1% 0.6% 1.8% net profit / average assets II. Liquidity ratios 1. Current ratio average current assets / average current liabilities 2. Quick ratio (average current assets inventories)/ (average current liabilities III. Turnover ratios 1. Receivables turnover ratio (days) average trade debtors x 360 days / sales revenues 15

17 2. Accounts payable turnover ratio (days) average trade creditors x 360 days sales revenues 3. Inventory turnover (days) average inventories x 360 days / sales revenues 4. Assets turnover sales revenues /average total assets IV. Debt ratios 1. Debt-equity ratio 51.7% 51.5% 45.6% average borrowed capital /average total equity The presented ratios in a synthetic form reflect the measurement of management effectiveness in the entities of the group, which should be assessed as good. Profitability ratios define the ability of sales to generate earnings. Within the analysed periods return on sales ratios gradually decreased. Their changes reflect changes in net profit generated by the group. In H the net profit margin was 0.2%. It dropped by 0.7 percentage point on H and by 2.5 percentage point on H Gross profit margin was 0.4%. It dropped by 0.5 percentage point on H and by 2.6 percentage point on H Worsening of the ratio means that the group has to realize bigger volume of sales to generate a certain amount of profit. The return on assets ratio (ROA), which indicates ability to generate earnings after taxes by all assets used by an entity, was 0.1% in the reporting period and was by 0.5 percentage point lower than in H and by 1.7 percentage point lower than in H Although ROA has been in the falling trend during the analysed periods, its levels indicate the effective use of assets employed. The return on equity (ROE) was 0.3% for H and dropped by 0.9 percentage point compared with H and dropped by 2.9 percentage point on H The drop of ROE in the analysed periods means that the growth in equity was bigger than the growth of profits. The growth in equity during the last years strengthened the financial position of the group. In H current liquidity ratio was 1.4, while quick ratio was on the level of 1.2. In the analysed periods both ratios showed a declining tendency by 0.1 percentage point period-to-period. In the case of current ratio it is assumed that its optimal value should remain between 1.5 and 2.5, while the quick ratio should approximate one or be slightly higher. Levels of liquidity ratios indicate good financial credibility of the group. Liquidity ratios provide information about the short-time financial security of the group; their values should be correlated with the level of the turnover ratio. The collection period of trade receivables in H was 108 days and was by 16 days longer than in H and by 7 days longer than in H Unfavourable change of the collection period was caused by the worsening financial condition of companies and occurring payment gridlocks. Because of their financial difficulties, purchasers impose unfavourable payment terms in the contracts, the 16

18 difficulties are also the cause of extended payments. Problems of payment by the contractors result in overdue debts. For trade receivables overdue at 30 June 2013 amounting to thousand PLN ( thousand PLN at 30 June 2012) an impairment provision was created in the amount of thousand PLN ( thousand PLN in H1 2012). The impairment covered the trade receivables for which the group s has a warrant of execution by the bailiff, that are within the estate in bankruptcy, or that were due over 180 days ago. In H1 2013, compared with H1 2012, the amount of impairment of trade receivables rose by 24.6%. According to the balance sheet data, payables are settled within 87 days. Maturity dates for payables vary from 14 days to 60 days. Within the analysed 6 months accounts payable turnover ratio was by 7 days longer that in H and by 21 days in H Although the period in which the group paid its debt lengthen, the turnover period for payables was shorter than in the case of receivables, which indicates that the ELEKTROBUDOWA SA group more often extends trade credit to its customers than utilizes such credit from its suppliers. Inventories turnover period, which was 29 days, provides information on the length of process of transforming the inventories into finished products sold. In H the inventories turnover period was by 3 days longer than in H and by 11 days longer than in H As the group recorded an increase in revenue on sales of products, goods and materials recorded in earlier reporting periods, the growth indicates that the volume of stock is suitably adjusted to the demand for the group s products. Furthermore, the period in which the resources are engaged in financing the inventories corresponds to monthly settlement cycles of most services provided by the group. The length of inventories turnover cycle indicates efficiency of managing the material resources of current assets. The activity of the group s entities is assessed by the assets turnover ratio, which measures the ability of assets owned by the group to generate sales. Asset turnover ratio was 0.6 and dropped by 0.1 percentage point both on H and H The level of the ratio in the analysed periods indicates balanced growth of sales revenues and the group s assets and therefore efficient use of property owned by the ELEKTROBUDOWA SA group. Debt-equity ratio informs about the relation between borrowed capitals and owned capital. In H compared with H the debt-equity ratio rose by 0.2% and by 6.1% compared with H Growth of the ratio informs about higher share of borrowed capital in financing the group s equity. In H the group released its lines of credits in banks. A 30 June 2013 the amount of used overdraft in current accounts and working capital loan totalled thousand PLN. Levels of liquidity ratios and inventories turnover ratio allow for a positive opinion of the financial situation of the group and its financial strategy. The group s payables are fully secured by the assets owned and equity gathered. The analysis shows that the group has strengthened its sound financial position achieved within recent years. 17

19 Presented above key parameters and ratios characterising the economic and financial position of the ELEKTROBUDOWA SA group and its equity have been calculated on the basis of the consolidated financial statements prepared under the going concern assumption. 2.4 Financial resources management In H the ELEKTROBUDOWA SA group implemented the policy of financing its operations from its own funds, party supported by borrowed capital in the form of liabilities which was provisionally in its disposal, and also by overdraft facilities and working capital loan. The group was fully capable of fulfilling its financial obligations. In H the group entities maintained overdraft facility in the current accounts and a limit of working capital loan up to the total amount of 51.0 million PLN. At 30 June 2013 the amount of debit was 24.4 thousand PLN. Cooperation with several banks ensured even distribution of committed sources of financing and to maintain suitable level of funds for working capital. The group used various products offered by banks and rationally utilized in its operations: daily balancing the accounts, automatic overnight deposits created from cash surplus, negotiated interest on deposits, negotiated exchange rates, financial market transactions derivative instruments (forward). Such behaviour allows to minimise financial costs and to optimize management of financial liquidity risk. The group s activity relating to foreign exchange transactions was determined by the exchange rates of basic currencies, EUR and USD. In H the group did not conclude any forward contracts with financial institutions to hedge the exchange rates. The group generally enjoyed natural hedging of foreign exchange risk, as the imports are realized in foreign currencies. In its financial policy the group consequently avoided using foreign currency options or any other risky financial instruments. The group companies maintain wide cooperation with banks and insurance companies with respect of contract bonds and signed agreements for contract bonds within the extended guarantee lines to secure: bid bonds, advance payment bods, performance bonds and warranty bonds and also to secure claims pursued in court and to guarantee timely payment of debt. Favourable contractual terms for guarantees are a strong competitive advantage and allow the group to take part in all tenders. In H compared with H the parent substantially increased the limit of loans and guarantees what allows it to maintain a good position in tender procedures (necessity to prove credit quality). Agreements with banks concerned mainly guarantee lines granted within multipurpose limits up to the total amount of million PLN (of which 51.0 million PLN for credits and million PLN for guarantees). As at 30 June 2013 they were utilized in the amount of 24.4 million PLN as overdraft in 18

20 the current account and working capital loan and million PLN as guarantees. In H the allowed limit of bank products was million PLN, of which credit facility 27.0 million PLN and guarantee line million PLN. At 30 June 2012 the multi-purpose limit of borrowing was utilized in the amount of million PLN for contract bonds and 1.6 million PLN as overdraft in the current account. The group, within the cooperation with insurance companies in respect of contract bonds had a total limit up to 54.9 million PLN, of which the amount of 37.2 million PLN was utilized as of 30 June The limit of guarantees granted by the insurance companies in H amounted to million PLN, of which 52.5 million PLN was utilized by the group entities. Assessing the level of funds owned and the amounts of expected inflows and expenses it must be pointed out that the resources will allow the group to finance both the investments planned for the second half of 2013 and also its current operating activity, with no risk of destabilizing the financial liquidity. 2.5 Human capital management In H average monthly employment was 2143 job equivalents and was about 2.2% lower than in H Out of the average number of employees, job equivalents fell to direct labour, whereas 1027 job equivalents to white-collar staff. The number of manual workers decreased by 7.9% compared with H1 2012, whereas the number of non-manual workers rose by 4.8% on H The average employment at the end of H was 2110 employees. The number of employees dropped by 121 compared with the end of H In respect of employment structure by education, the number of personnel with higher education, mainly engineering, regularly increases. At the end of June 2013 the number of employees with degrees accounted for 37.5% of total, while at the end of June 2012 t was 33.9%. The H productivity of employment, calculated as the relation of sales revenues and average monthly employment amounted to 179 thousand PLN. Profitability of employment, calculated as the relation of gross profit and average monthly employment, was 1 thousand PLN in H Compared with H the productivity index decreased by 22 thousand PLN and the profitability index fell by 1 thousand PLN. In the period from 1 January to 30 June 2013 together 87 new people were employed in different trade groups, from direct labour through specialist in various areas to managerial posts. There were no collective redundancies during the six reporting months. Only in a few instances the provisions of law on the so called collective redundancies were applied, connected with completion of some contracts. Average gross monthly pay in H in the ELEKTROBUDOWA SA group was PLN. Its amount, which is much higher that average monthly salary in Poland, is principally attributed to the group s foreign contracts, where the group maintains the level of guaranteed pay applicable according 19

21 to the local collective agreements. In H average monthly pay in the group rose by about 3.8% compared with the same period of the prior year. The group consequently implements an incentive programme targeted at increase of profit margins and performance and develops non-pay methods of motivation to support the process of recruitment and retaining employees and to increase the level of motivation and effective work. In H several events to celebrate the 60th anniversary of the parent, ELEKTROBUDOWA SA were organized, funded from the Company Social Benefits Fund. Development of employee s qualifications and competence is a key for the development of the group. So, as in previous periods, in H training policy was continued, basing on the Procedure for Personnel Training and Development which is included in the ISO system valid in the parent. Expenditure on training principally concerned the policy of systematic development of the project management-focused corporate culture and also the issues of enhancing professionalism of work teams, particularly managerial skills and language skills. In H the group invested 717 thousand PLN in training of its personnel, which gives an average of 335 PLN per one employee. Training costs accounted for 1.0% of the total H remuneration fund. The implemented development programmes not only contribute to the increased professionalism of employees and development of their skills but also complement the applied incentive systems and plans. Cooperation with the trade union organisations was very good in the period. There were no labour disputes in the group companies, or collective bargaining with the trade union organisations acting in the companies. Like in previous years the group s companies supported and respected generally accepted human rights as well as observed standards in the scope of the employee right of association and collective negotiations, and counteracting discrimination practices. Since 1 December 2010 the parent, ELEKTROBUDOWA SA has been a member of the Global Compact. The UN Global Compact is a unique, powerful platform for skill-sharing, implementation and disclosure of sustainability and social governance policies and practices. It has over corporate participants and other stakeholders from over 135 countries. Aware of environmental impact of the group s activity the parent actively participates in shaping its positive impact on local environment in the area of broadly understood Corporate Social Responsibility. All CSR activities provide many advantages for ELEKTROBUDOWA SA, including: - greater legitimization of conducted business, - demonstrating a leadership position in the issue of responsibility towards the communities, - increased level of employee satisfaction, - better reputation and increased brand value for customers, investors and employees, particularly in the context of changing social expectations, - ensuring the company s responsibility and transparency in communication with the publics. 20

22 The parent, ELEKTROBUDOWA SA for the sixth consecutive time was included, together with several dozen of WSE-listed companies, in RESPECT INDEX, the first in Central and Eastern Europe stock exchange index which includes listed companies leaders in considering social issues in their strategies. 2.6 Occupational Health and Safety Management The parent, ELEKTROBUDOWA SA has the following certificates - the certificate of the Occupational Health and Safety Management System according to the requirements of SHE Checklist Contractors, SCC**2008/5.1 valid throughout Europe with the exception of Finland; - the certificates issued by DNV for conformity of the Occupational Health and Safety Management System to the PN-N-18001:2004 and OHSAS 18001:2007 standards in the scope of design, manufacture, erection and service of power and automation systems, building investment projects management. In March and April 2013 the parent s Occupational Safety System Management was recertified by DET NORSKE VERITAS for conformity to PN-N-18001:2004 and OHSAS-18001:2007 standards and SHE Checklist Contractors, SCC**2008/5.1. The results of recertification were positive. During H there were no instances of an occupational illness. No claims were raised against any of the ELEKTROBUDOWA SA group companies due to nonobservance of safety requirements or due to accidents at work. At 30 June 2013 there were two cases on acknowledging the near misses as accident at work pending before the District Court Katowice Zachód in Katowice, 7th Department of Labour and Social Insurance and before the District Court in Chrzanów, 4th Department of Labour. 2.7 Quality System Management The group is focused on the continual improvement of product quality, with respect to the environment. The entities in the group are permanently involved in quality issues through the certified quality systems. The parent, ELEKTROBUDOWA SA applies the Quality Management System according to EN ISO 9001, and the Environmental Management System based on the model presented in the EN ISO standard. The Quality Management System has been supplemented with: - the NATO requirements defined in the document AQAP-2110, - the requirements for welding - according to PN-EN ISO The Busduct Factory also meets the quality requirements for manufacture of pressurized equipment for conformity with European Pressure Directive 97/23/EC. 21

23 The subsidiary, ENERGOTEST sp. z o. o. has certificates for conformity to: - EN ISO 9001: Quality management system; - PN-EN 14001: Environmental management system, requirements and guidelines; - PN-N 18001: ; Occupational health and safety management system; - BS OHSAS 18001:2007 Occupational health and safety management systems Requirements. All the above systems, including supplements, are regularly audited and recertified to a relevant standard. The quality management system is integrated with the environmental management and occupational safety management systems. Integration generally consists in development of common documentation, common auditing of the management systems, setting goals and targets. The key objective of the above systems is constant improvement of quality of our products, with care for environment by preventing and mitigating adverse environmental impacts and with fulfilling the OHS requirements. Essential events that occurred in the group in H and which affect the assessment and functioning of the integrated quality and environmental management systems: - an audit for qualified supplier of AREVA carrying out projects for construction of nuclear power plants, among other projects; completed with a positive result; - an audit of supervision over the quality and environmental management systems, completed with a positive result; - reviews of the Integrated Management System which certified that the parent s quality management system supplemented with the AQOP requirements and quality in welding, the environmental management system and the occupational health and safety management system were intergrated and fuctioned correctly; - internal audits of the integrated quality and environmental management system, which were tools for the management systems improvement; - internal trainings to present basic principles of functioning of the management systems, employees obligations towards the environment and fulfilling quality standards; - an audit recertifying for conformity to EN ISO 9001:2008 and an certification audit for conformity to PN-EN 4001:2005, PN-N 18001:2004, BS OHSAS 18001:2007 in ENERGOTEST sp. z o.o. Plans for the second half of 2013 include: - further training, meetings with contract managers and supervision staff in order to eliminate cases of non-observing the environmental regulations and quality requirements for manufactured products and supplied services, with particular attention to amendments to the risk management procedure; - continuation of the process of selecting a computer system of management and archiving servicerelated documents in a proper way; - continuation of the process of defining the so called unorganized emissions in the parent s divisions: Power Generation Division and Industry Division, including examining the offers and 22

24 selecting software to aid the correct management of unorganized emissions and wastes in ELEKTROBUDOWA SA; - continuing the implementation of quality costs account, which should help improve the quality of produced equipment and provided services; - development of a training plan ofor internal auditiors, Academy of Auditors 2013; - implementation of planned corrective actions in ISO PN-EN in ENERGOTEST sp. z o.o. Positive results of internal and external audits, records in the review reports prove that the systems applied by the group function correctly and that the group companies supply products and services in compliance with the relevant contracts for supplies and services and fulfil their duties towards the environment Prospects for business development of the ELEKTROBUDOWA SA group and significant risks or threats In the period forom January to June 2013 the Polish building output was by 21.5% smaller than in the comparable period a year before, when it rose by 8.0%. Further decline in the volume of building output is predicted, mainly because of restricted demand from the public sector. Level of uncertainty is relatively high, so companies are unable to provide reliable forecasts with respect to sales for a period longer than one year. The longest average period of time for which the companies ar sure to have work to do, basing on the concluded contracts, is now only 8 months. The most effective way to win new orders are public tenders and long-term cooperation with an investor. As at 30 June 2013 the order backlog of the parent amounted to million PLN and rose on the comparable six months of 2012 by million PLN, that is by 102.0%. In H the volume of orders received by the parent, ELEKTROBUDOWA SA reached the value of million PLN, which is the growth by million PLN, i.e. by 198.2% compared with H The sales revenues generated by the group in H amounted to million PLN and were by 58.4 million PLN (by 13.2%) lower compared with H Growth in the value of generated revenues in the consecutive fiscal year was possible owing to: diversification of order portfolio; consistent development of customer service network; increasing share of export. The management of the parent, ELEKTROBUDOWA SA attaches considerable significance to strengthening the group s competitive advantage in foreign markets and to growth of exports. The group actively seeks new market for its products and boosts its export sales in its traditional areas. The parent has five foreign permanent establishments registered, through which it performs services in Finland, Luxembourg, Estonia, Germany and the Netherlands. Through the operation of its associates the group introduces its products in the markets of Russia, Ukraine and Saudi Arabia. 23

25 Like in previous years, the sales offer of the ELEKTROBUDOWA SA group in H did not significantly change and was still based on the following products and services: 1. Overall electric installation in the range of medium and low voltages for new, modernized and retrofitted power generation facilities. 2. General realization of investments, including public utility facilities, retail centres, industrial facilities. 3. Supply of complete automation and electrical systems. 4. Manufacture of electrical automation devices. 5. Manufacture and installation of high-current busducts (ELPO, ELPE, PELPO). 6. Manufacture of indoor medium and low voltage switchgear assemblies. 7. LV. MV, HV stations. 8. Turnkey supply of electrical substations and high and extra high voltage lines for distribution and industrial operators. 9. Commissioning tests and start-up. 10. Design of equipment. 11. Servicing. 12. Conceptual work and consulting. 13. Property management. Customers were offered complex (EPC) project performance, starting with designing and prefabrication of equipment through delivery, installation, start-up together with operation during the trial period, and ending with after-sales service. The group s potential allows it to put into effect the majority of complex projects on its own. Growth of the ELEKTROBUDOWA SA group to a large extent depends on customers representing the following branches: power industry, building and petrochemical industries, mining, metallurgy, retail sector and the army. Each of the foregoing branches has specific requirements in the area of services and products involved with generation, transmission and use of electric energy; they differ in ways of conducting business and have different economic situation. Future income of the group will undoubtedly depend on such factors as: - favourable economic situation in the power, chemical, metallurgy, mining and building trades, - price level of electrical materials and equipment as well as metallurgic products, - intensification of soliciting activities, particularly on the markets of Central and Eastern Europe and in Saudi Arabia, - course of privatization processes, especially in the power industry, - consistent reducing the group s administration costs, - increasing requirements for financial security of projects in the segment of power industry construction, - financial situation of investors and resulting complications with payments. Many purchasers already impose extended payment terms and introduce more and more complicated methods of payment, difficult to accept as early as at the stage of analysing a request for quotation, and often resulting in withdrawal from tender. 24

26 Polish construction market of recent years was strongly stimulated by EU funds and choosing Poland as a host of 2012 UEFA European Football Championship. These two factors had the greatest influence on market trends. The economic situation of the country is in a slowdown, and the situation of the building industry is more difficult than general economic situation. Limited demand in the domestic market as well as the intense fight for new contracts between companies force to look for new opportunities abroad. The unique geographical position of Poland and development of trade routes with developed markets are an advantage in the development of exports by national business. The group constantly undertakes intensive efforts to increase the volume of exports. The parent, in cooperation with other group s companies recognises the needs of foreign markets through participation in symposia and conferences and promotes its products and services in trade fairs and exhibitions. Joint participation of ELEKTROBUDOWA SA, VECTOR Ltd. and ENERGOTEST sp. z o.o. in the Energetika & Elektrotechnika 2013 Exhibition in Sankt Petersburg created an opportunity for presenting the latest technical solutions of the three companies to our customers. The group presented its HV GIS (OPTIMA 145), busducts type PONTIS, automated MV switchgear (D-12PL, in a hundred percent built on subassemblies available in the Russian Federation) and the switchgear dedicated for mining, PREM-GO. The above activities will bring a substantial growth in the second half of the year in the sale of finished products and will also significantly strengthen the trademark in the Russian Federation. For a few years the ELEKTROBUDOWA SA has been successful in selling its products in Saudi Arabia. The products are sold by the parent and the exports include the equipment manufactured by the Power Distribution Division in Konin and the Busduct Factory in Tychy. The division in Konin sell its products through the associate, SAUDI ELEKTROBUDOWA LLC. The parent estimates that in result of extensive marketing of the last few years implemented by the associate, the growth trend of exports of medium voltage switchgear to Saudi Arabia will be maintained. In 2013 SAUDI ELEKTROBUDOWA LLC supplied the 13.8kV switchgear for a new hospital in Nairan in the south of the country (a project of the Saudi Ministry of Health). In 2013 further two orders were awarded, for the supply of switchgear to the Hammadi Hospital in Rijadh (Client Nour Industries) and for the supply of distribution panels for switching the reactive power compensation systems for FOA SEC East (Client TIEPCO) in Arar and Quarayath, the towns in the north of the country. The Kingdom of Saudi Arabia is in a constant investment boom in power industry, other industries and housing construction, financed by the government. Because of steady, huge cash inflows from the sale of oil, the Saudi economy practically is not prone to the effects of the crisis which still besets the world s economy. The country s electric power infrastructure is being intensely extended on all voltage levels. There are also gigantic investments in power generation industry, where the intensive development of solar (photovoltaic) power plants and nuclear power plants is expected. Basic products offered and sold in the Saudi market are D-17P switchgear panels of the 13.8V system and D-40P switchgear for the 33kV system. In the Saudi market the Busduct Factory in Tychy supplies its isolated-phase busducts ELPE and nonsegregated phase busducts ELPO, with supervision and installation services. 25

27 The group is going to continue to strengthen its position in the Russian and Ukrainian markets. For five years now an associate, the Power Equipment Production Plant VECTOR Ltd has been operating in Russia, while in Ukraine the group has its subsidiary ELEKTROBUDOWA Ukraine Ltd. Both companies are the suppliers of the parent s products to their local markets. Mobile substations type SKP equipped with medium voltage switchgear, and indoor MV switchgear will remain principal products exported to Russia and Ukraine. The growth of independent production competence in the associate, Power Equipment Production Plant VECTOR Ltd, changed the position of ELEKTROBUDOWA SA in H from the supplier of finished products to the supplier of some materials for manufacture of the products on the basis of constructions designed by VECTOR. Consequently, the volume of supplies of finished products to the Russian market decreased in H Both ELEKTROBUDOWA UKRAINE Ltd. and VECTOR Ltd. carry on design and consulting connected with preparation of distribution of HV GIS (OPTIMA 145) as soon as the certification in those markets is completed. The ELEKTROBUDOWA SA group thoroughly analyses the market on which it operates and identifies segments prospective for its business development. In the years to come the power industry will be the main driving force of the Polish industrial building sector which badly needs substantial investment in generating facilities and network. The investments in renewable sources of energy seem prospective as well. The construction industry expects a boom since 2014 when projects from the new EU financial perspective will be launched. Recovery of this sector should be clearly visible in Applicable European standards concerning environmental protection provide good prospects for development of waste handling and sewage treatment projects. The ELEKTROBUDOWA SA group has suitable human capital and financial resources to involve in future projects planned by the power and gas industries and renewable energy sources. However there is a serious fear that the observable downturn in building industry and worsened financial situation of Polish companies will considerably contribute to delays of new projects. Difficulties that companies have to face will be related with insufficient demand both from the public and the private sector. In the nearest quarters of the year it will be difficult to improve profitability, as orders will be won in the period of tough competition and probably concluded under unfavourable terms imposed by the purchasers. The wave of bankruptcies of companies and arrangement bankruptcies results from the scale of downturn in the building industry and will spread to cooperating industries. For many companies it will cause the necessity of write-offs, particularly in the case of arrangement bankruptcy. The described situation of the building industry will surely affect the operations of the group in the whole year Forecasts prepared by the parent account for deteriorating market conditions in the sector where the group operates. 26

28 One of major challenges that the group has to face is maintaining financial liquidity. It is of particular importance in the context of decreasing number of orders and growing problems with payment gridlocks. Deteriorating financial situation of investors is the cause of frequent changes of investment plans and considerable uncertainty about projects being executed. Strong competition inside the branch and insufficient demand are essential barriers which restrict the activity of the group and which directly translate into lower margins on projects. Winning new orders in tender procedures where the mostfavourable-price bids are successful keep the profit margins on a low level. Furthermore, execution of awarded orders is bound with the building materials price risk, as price changes may have adverse influence on contract profitability. Instead of introducing provisions which would improve organization of the procurement market, more restrictions are introduced to regulations, which increase the existing overbalance to the advantage of investors. It is becoming a norm to transfer to a contractor the risk of financing projects during their execution, by invoicing at long intervals, extended payment terms or increasing requirements for financial security of project execution. In performing its business operations the group is exposed to various risks, such as: - market risk (including foreign exchange risk, change in fair value or cash flow caused by changes of interest rate and price risk); - credit risk; - liquidity risk. Detailed description of risks is presented in chapter 4 of additional information to the consolidated financial statements for H Risk management is a process of identification, evaluation, management and control of potential occurrences or situations, aiming at provision of reasonable assurance that organisation s objectives will be accomplished. Risk management is focused on limiting the risks and protecting against their impact. The Management of the parent establishes the general rules for risk management and policies for specific risk areas. 3. MARKET SITUATION - SALES AND PROCUREMENT 3.1 Sales destinations The activity of the group is concentrated mainly in the Polish market. Because of difficulties encountered by the construction industry in recent years and deteriorating economic situation in the Polish market the group focused on building up its competitiveness in foreign markets and systematic increase of exports. Export sales in H which included supplies within the European Union and to the countries outside the EU generated the revenue of thousand PLN, which accounted for 33.0% of total sales revenues, whereas the H exports generated 26.7% of total revenues. The group s exports in H increased by 7.5% compared with the six months of

29 Presented below is an itemization of sales revenues of the ELEKTROBUDOWA SA group according to business sectors to which sales were made in H and H Business areas H H1 201 Value (PLN 000) % Value (PLN 000) % Power generation Mining Chemical industry Housing and public utility construction Transport Paper & pulp Power distribution Retail facilities Industrial automation Metallurgy Building materials Sports facilities Food industry Environmental protection plants Automotive industry Other areas Export of products and materials Total As in previous years, power generating sector was the biggest source of the group s income in the six months of 2013 (23.9% in the sales breakdown by industries) where the group is present with its products and comprehensive range of electric installation works in all newly erected, extended or modernized power stations. The biggest project executed by the group for this sector was the design and build execution of the project: Extension of the 400/110kV station Słupsk Stage I and II in order to connect the 240MW wind farm Słupsk, the 320MW wind farm Potęgowo, with the installation of 400/110kV autotransformer for connection of the ENERGA OPERATOR S.A. networks, performed for Polskie Sieci Elektroenergetyczne Operator S.A., The works had a 3.7% share in the sales revenues. Mining industry had a significant, 12.0% share in the group s sales revenues generated for the six months of Compared with H this share rose by 3.2 percentage point. The group provided supplies and services generally for brown coal mines, hard coal mines and copper mines. The biggest amount was earned on the turnkey supply, as a General Contractor, of a new Combined Cycle Unit 28

30 of electrical capacity 45MWe and thermal capacity 40MWt in KGHM Polska Miedź S.A. for KGHM Polska Miedź S.A., Głogów (3.0% of total sales revenues generated by the group). Another area of the group s activity was the chemical industry (8.0%). The volume of sales to the chemical industry principally concerned two projects: supply of services related to site preparation for construction of the Flue Gas Desulfurization (FGD) plant within the framework of the project: Adjustment of the Heat & Power Plant in Płock to the Emission Standards Applicable from 1 January 2016 Site Preparation for Construction of the FGD Plant for Polski Koncern Naftowy ORLEN SA (3.4% share in sales revenues); Construction of SCR/EF Installation Including Infrastructure for Polski Koncern Naftowy ORLEN SA (2.8% share in sales revenues); In H the chemical industry increased its share in the sales revenues by 5.3 percentage point compared to the same period of the previous year. Services for residential and public utility building had a 6.6% share in total revenue earned by the group in H and rose by 3.9 percentage point compared with H The biggest contracts for this branch included turnkey site engineering and construction of the Integrated Communication Centre at Poznań Główny railway station for Poznań City Center I Sp. z o.o. (2.3%), construction of a complex of three multi-family houses together with underground and surface car parks and internal infrastructure, for Na Skraju Lasu Sp. z o.o. (0.9%) and complete electrical installations in Hotel Marriott Okęcie for Alpine Construction Polska Sp. z o.o. (0.8%) Transport is the next branch in the hierarchy according to the share in total revenues. It share in total revenues generated by the group amounted to 5.5% and dropped compared with H by 0.5 percentage point. The main contract concerned building the Franowo tramway depot in Poznań for MPK w Poznaniu Sp. z o.o. which accounted for 5.1% of total sales revenues. In the six months of 2013 the group earned the revenue of 6.5 million PLN from contracts performed for the paper&pulp industry. The amount constituted 1.7% of the group s total sales and this share fell by 0.6 percentage point compared with H The sales principally concerned the supply of equipment and services for the industrial and building electrical installations for STORA ENSO Narew Sp. z o.o., responsible for 1.4% of the group s total sales. Other market segments, responsible for 42.3% share in the revenue on sales of products, goods and materials, allowed the group to considerably supplement its sales outside the above basic industries. 29

31 The destinations and structure of exports are presented below: H H Value (PLN 000) % Value (PLN 000) % Finland Russia Turkey Saudi Arabia Ukraine Germany Luxembourg Kazakhstan Republic of South Africa Belarus Greece Estonia France The Netherlands Switzerland The USA Sweden Other countries Total export sales Export sales generally concerned installation services provided in the Scandinavian market. Sales revenues were generated mainly on the contract for electrical and I&C systems for the NPP OLKILUOTO 3 in Finland. The invoiced value of works performed at this site in H amounted to 60.4 million PLN, corresponding to 47.8% of total export sales revenues. Sales of equipment and services to Russia still have an important position in total export revenues. In H the group sold its products and services on the Russian market for the amount of 16.5 million PLN that had a 13.1% share in total exports realized by the group. The products and services were sold in the Russian market through the associate, the Power Equipment Production Plant VECTOR Ltd. A significant position in the structure of exports belongs to Turkey. The sales to this country reached the level of 12.2 million PLN accounting for 9.7% of the group s exports. In H sales to Turkey included finished goods (mainly busducts) in the value of thousand PLN (9.6% in the structure of export sales) and other services in the value of 121 thousand PLN (0.1% in the structure of export sales). 30

32 A significant, 7.6% share fell to Saudi Arabia where the group earned 9.7 million PLN. The sales included mainly busducts manufactured by the Busduct Factory in Tychy, for the value of thousand PLN accounting for 6.9% of total exports. Also the sales to Ukraine, in the value of 6.9 million PLN, had a substantial that is 5.4% share in export revenues. The group sold its goods through the subsidiary, ELEKTROBUDOWA UKRAINE Ltd. which promotes ELEKTROBUDOWA s products in the local market. The next in the structure of exports were the sales to Germany (4.6%). Sales in the German market were realized through the parent s permanent establishment. The sales included the installation of electrical precipitator system behind Power Unit D and E in Hamm Power Plant (Westphalia, Germany) and amounted to 5.8 million PLN in the six months of Revenues earned on services performed by the group through the establishment in Luxembourg also were bigger in H (by 2.0 percentage point. Export sales to this country generated 4.5 million PLN in H (3.6% share in total exports), and concerned the extension of the existing Vianden Water Power Plant, unit 11 in a new cavern. Kazakhstan was another significant market for exports; sales to this country had a 2.3% share in total. The group sold construction services related to the construction of a sterile dosage forms factory Santo in Kazakhstan (2,1% in the export sales structure) and finished products (switchgear which value constitutes 0.2% of export sales). Total value of revenue earned on sales of services and products to Kazakhstan in H was 2.9 million PLN. Sales to the Republic of South Africa accounted for 1.9% of total exports. Value of sales was 2.4 million PLN and concerned the isolated-phase busducts ELPE manufactured by the factory in Tychy. The ELEKTROBUDOWA SA group constantly looks for new markets. Intensive actions are being taken to promote the groups goods and services, both in developed countries and in emerging markets who are in the stage of developing their infrastructure. Taking advantage of a specific geographical situation of Poland and the development of trade routes to developed countries the group strives at changing its local perspective into global one. The parent penetrates foreign markets in order to meet its future partners and to acquaint with the specifics of local trade. 3.2 Dependence on one or more customers In H the group recorded its highest sales income on performance of the contract for the erection of electrical and I&C systems carried out at the site of NPP OLKILUOTO 3 in Finland. Value of works performed for this project in the reporting period was 60.4 million PLN, which constituted 15.8% of the group s revenues generated in this period. In the six months of 2013 the group s revenue earned on two customers exceeded 10% of total revenue on sale of products, goods and materials. The customers were the recipients of services provided by two business segments: the Power Generation Division (15.8% of the group s revenue) and the Industry Division (12.7% of total revenue). 31

33 3.3 Sources of supply In H the sources of supply did not change much as compared with previous years. The group does not depend on one or several suppliers, whose share in sales revenues would exceed 10%. However, keeping in mind the necessity of cutting costs the group is looking for new suppliers of materials who would offer more favourable purchasing conditions. 4. SIGNIFICANT AGREEMENTS 4.1 Construction contracts and contracts for supply of goods Total value of orders received in the six months of 2013 by the parent amounted to million PLN. The awarded contracts included: - construction of a new heat generation unit with fluidized bed boiler, heating and condensing turbine and associated plants in TAURON Ciepło SA Zakład Wytwarzania Tychy. - extension and modernization of the 220/110kV station Skawina, including connection of the 2x2x400kV line, for Polskie Sieci Elektroenergetyczne S.A. - extension and modernization of Byczyna substation including connection of the 400kV line, for Polskie Sieci Elektroenergetyczne S.A. - turnkey delivery of items of infrastructure dedicated for the new Flue Gas Desulfurization (FGD) plant being constructed in the heat and power plant located in the PKN ORLEN SA production facility in Płock. - additional scope of works at the NPP OLKILUOTO 3, for AREVA NP GmbH - supply of complete 3kVDC switchgear for PKP Energetyka S.A. - the complete modernization of the electrical supply system for the electrolyzers, comprising engineering, procurement, construction and commissioning of the supply installations of new electrolyzers system in the ANWIL factory in Włocławek - replacement of Transformer-Rectifier Units for the Tank Room in P-27 division of the copper mill Głogów for KGHM Polska Miedź S.A. - overall engineering and site erection of the project relating to the Integrated Communication Centre at the Central railway station in Poznań for Poznań City Center I Sp. z o.o. - manufacture, supply and installation of the 6kV switchgear panel type D-12/D-12-2P and the mobile substations type SKP for the project: Modernisation of 6kV switchgear: PW2, PW3, PW4 in PGE GiEK Oddział Elektrownia Bełchatów for Energoserwis Kleszczów sp. z o.o. - EPC contract (Engineering, procurement, erection and commissioning of electrical systems for wet flue gas desulfurization system of steam boilers OP-380, OP-430, K1, K2, K3 and the water boiler WP-120 KW4 / KW6 in the companies of Grupa EDF Polska in the facility of EDF Kraków, for RAFAKO S.A. 32

34 4.2 Insurance contracts The group maintains the property and personal insurance policies in the following scope: comprehensive car insurance; all-risks contractor s / erection insurance; business civil liability insurance, property liability insurance and product liability insurance, architects, designers and construction supervision inspectors liability insurance, corporate property insurance, cargo insurance; foreign business trip casualty insurance; collective health and medical care insurance of employees in Finland, electronic equipment insurance managers civil liability insurance, group life term insurance. The entities of the group cooperate with Towarzystwo Ubezpieczeń HDI ASEKURACJA S.A. in Warsaw, Towarzystwo Ubezpieczeń i Reasekuracji "WARTA" S.A. in Warsaw, Towarzystwo Ubezpieczeń Allianz Polska S.A., AIG Limited S.A. in Warsaw, ING Nationale Nederlanden Polska SA, Towarzystwo Ubezpieczeń HDI Gerling Polska S.A., PZU S.A. Branch in Poland and Ukraine, ERGO HESTIA SA in Sopot, UNIQA Towarzystwo Ubezpieczeń Branch in Katowice, GOTHAER TU S.A. in Warsaw, TU AIG branch Ukraine. 5. INVESTMENTS 5.1 Investments carried out in H The group s investment outlays amounted to thousand PLN in H1 2013, of which the parent spent thousand PLN and 766 thousand PLN the subsidiaries, of which: 486 thousand PLN ENERGOTEST sp. z o.o. and 280 thousand PLN ELEKTROBUDOWA UKRAINE Ltd. Total investment expenditure incurred by the group in H included: - expenditure on fixed assets thousand PLN, - expenditure on intangible assets thousand PLN, of which: - outlays for R&D thousand PLN. Capital expenditure for research and development in the six months of 2013 concerned mainly implementation of manufacture of a new product developed by the parent, high voltage switchgear type OPTIMA 145. Related costs incurred in H amounted to thousand PLN while the expenses since the beginning of the project until the reporting day totalled thousand PLN. 33

35 A considerable part of the expenditure on non-financial fixed assets was earmarked for further modernization and current reproduction of fixed tangible assets of the company and for erection of new structures. The expenditure in the group of buildings and structures amounted to thousand PLN and concerned the following facilities: - adaptation of a production bay to the requirements of GIS switchgear in Konin: thousand PLN, - modernization of production hall no. 2 in Konin: 399 thousand PLN, - modernization of the north part of the office building in Katowice: 300 thousand PLN, - installation of computer network in Katowice: 55 thousand PLN. In H the equipment to streamline the production and assembly processes was bought for the sum of 908 thousand PLN. Main items of the purchased machinery and equipment include: - press CNC TRUBEND: 333 thousand PLN, - lifting device for cable drums: 40 thousand PLN, - welding set TETRIX 451: 37 thousand PLN, - welding half-automatic machine ESAB: 36 thousand PLN, - hydraulic machine for cutting and flanging of sheets: 136 thousand PLN, - Klauke set for cable pressing: 26 thousand PLN, - welding set TETRIX 351: 25 thousand PLN, - Fleku measuring instrument: 20 thousand PLN. Furthermore, the replacement of physically and morally worn computer hardware was continued, for which the amount of 868 thousand PLN was earmarked. The expenses for modern software, licences and trademarks amounted to 422 thousand PLN Outlays for vehicles amounted to 590 thousand PLN - the fleet of vans and motors cars was enlarged and an accumulator truck and a cable trailer were purchased. The investments in H were financed from the funds owned by the group s entities and only a small part of those resources came from selling of some tangible assets. 5.2 Investment plan for the second half of 2013 Planned capital expenditure for non-finance fixed assets in the second half of 2013 amounts to 15.6 million PLN and include the following investment: - continuation of adapting the production bay to the requirements of GIS switchgear in Konin, - modernization of the technical building in Konin, - modernization of the ventilation and heat recuperation system in the paint shop in Konin, - anti-electric floor in the paint shop in Konin, - modernization of social and office areas, in Konin. 34

36 Modernisation of machine fleet will be continued. Purchase plans include: TruPunch 3000 punching machine, 3-phase system of switchgear heating TRANSFORMEX, HV/MV circuit breaker tester (ACTAS 24 manufactured by COCOS), portable, motor operated machines for processing copper bars, multi-function hoist Manitou, MV cable diagnostics equipment, cutting-off machine, 3-phase tester of protection ARTES440, two fork lift trucks. A part of investment outlays planned for the second half of 2013 will be earmarked for further improvement of modern workplace organisation, including purchase of computer hardware and software. As far as financial investments are concerned, in the second half of 2013 the parent plans to spend the sum of 410 thousand PLN for acquisition of shares in the increased capital of SAUDI ELEKTROBUDOWA LLC registered in Riyadh in the Kingdom of Saudi Arabia. After capital increase ELEKTROBUDOWA SA will hold a controlling interest in equity of SAUDI ELEKTROBUDOWA LLC. Having taken control over the company ELEKTROBUDOWA SA will be able to exercise influence over its financial and operating policies and thus earn profits from its business activity. Implementation of investment plans Taking into account the financial standing of the group described in item 2.2 of this report, stable liquidity ratios and order backlog for the second half of 2013 it is evident that realization of the investment plans, including capital investments is not at risk. As in the previous period, the group is going to finance the investments from its own funds, which finds confirmation in the gathered funds and owned financial assets. 6. RELATED PARTY TRANSACTIONS In H all transactions entered into by the group s entities with the related parties were typical, arm-length transactions carried out within normal current operating activity. Transactions between the parent and its subsidiaries, who are the related parties for ELEKTROBUDOWA SA, were eliminated in the consolidation. In the reporting period the parent, ELEKTROBUDOWA SA carried out the following transactions with associates: - sales of goods the Electrotechnical Company VECTOR Ltd thous PLN - sales of materials - the Electrotechnical Company VECTOR Ltd. 535 thous PLN 35

37 Mutual balances between the parent and the associated undertakings as at 30 June 2013: Balances between the parent and the associated undertakings as at 30 June 2013: - payables of the Electrotechnical Company VECTOR Ltd. to ELEKTROBUDOWA SA thous PLN of which dividend thous PLN The unsettled balances of receivables and payables with the associates are not secured and will be settled in cash in the agreed payment dates. None of companies in the ELEKTROBUDOWA SA group extended any guarantees to the associates for securing contract bonds. In the reporting period costs of doubtful receivables from transactions with related parties were not recognized. ELEKTROBUDOWA SA did not create provisions for unsettled balances with the associates as at balance sheet date. 7. INFORMATION ON CREDITS, LOANS, SECURITIES AND GUARANTEES. 7.1 Credit contracts as at 30 June 2013 Bank Type of loan Contract validity Limit of credit 1. ING Bank Śląski w Katowicach overdraft and working capital loan million PLN 2. Bank PEKAO S.A. w Krakowie overdraft facility million PLN 3. PKO BP w Warszawie overdraft facility million PLN 4. BRE BANK SA w Warszawie overdraft facility million PLN 5. BNP PARIBAS Bank Polska S.A. overdraft facility million PLN In H the ELEKTROBUDOWA SA group was provided with the limit of overdraft in current accounts up to the amount of 51.0 million PLN. As at 30 June 2013, the amount of 10.4 million PLN of the limit of overdraft in the current accounts was utilized, while the working capital loan was utilized up to 14.0 million PLN, of which: - in ING Bank Śląski S.A million PLN, - in Banku PKO BP S.A. 3.8 million PLN, - in BRE BANK S.A. 6.6 million PLN. 36

38 7.2 Other loan agreements In H the entities of the ELEKTROBUDOWA SA group neither were granted nor did themselves extend any loans. 7.3 Guarantees and Sureties As at 30 June 2013 the ELEKTROBUDOWA SA group extended contract bonds issued by banks and insurance companies for the total amount of million PLN. The guarantees included bid bonds, advance payment bonds, performance bonds, warranty bonds, and also guarantees to secure claims against the group s entities pursued in court and guarantees to secure timely payment of debt. The group also uses promissory notes to secure performance of contracts and contract payments, which amount totalled 22.6 million PLN. The promissory notes issued by the group also secure credit lines and guarantees issued by banks or insurance companies. In the six months of 2013 the group companies did not extend any sureties PERFORMANCE AND THE PUBLISHED FORECAST FOR 2012 After the six months of 2013 the ELEKTROBUDOWA SA group earned net profit amounting to 857 thousand PLN (profit attributable to the company shareholders is 857 thousand PLN) and generated sales revenues amounting to thousand PLN. The 2013 annual budget for the ELEKTROBUDOWA SA group published on 26 April 2013 assumes that the company will generate sales revenues in the amount thousand PLN and the net profit of thousand PLN. It results from the above figures that the budgeted annual sales revenues were realized in 38% and the net profit in 2%. The financial results of the first half of 2013 oblige the Management to submit a new forecast for the year BASIS FOR PREPARATION These consolidated financial statements have been prepared under the assumption that the group will be able to continue with its operations in the foreseeable future. As of the day of preparing the statements no circumstances exist which would indicate that the continuation of business is at risk. The consolidated financial statements were prepared under the historical cost convention, with the exception of revaluation of some fixed assets and financial recognised at fair value. 37

39 10. MAJOR TECHNICAL DEVELOPMENT WORKS The H development works were implemented by the entities of the group in the following scope: construction of a new variant of D-12-2P switchgear fitted for mounting ROLLARC contactors and motor controlled earthing switch and withdrawable part, supplementary tests were performed in the Electrotechnical Inmstitute in Warsaw. The switchgear was implemented to prodiction, a series of panels was manufactured for a customer; development of documentation and implementation for production of the mobile substation consisting of 6 containers, 31 m length, 6.5 m width, designed for a Russian customer, development of documentation and implementation for production of the double system switchgear D-12-2S to be installed in the above station; testing of the model of a 24kV circuit breaker with electromagnetic drive, adapted for applications in SF6 insulated switchgear; a prototype of a DC disconnector for 3.3kV and 4000A; supplementary tests of D-24-2S switchgear with reduced width of distribution panels (800m), construction documentation of a variant of PREM-GO switchgear with 4 functional compartments fully compartmented version; development of technology of production of flexible connectors of busduct enclosures; development works on starting the production of aluminum supports for busducts; developm,ent and implementation of synchrophasors estimation acc. to the standard C37.118; extension of functionality of ETcom software; protection concentrator for PSE. Major R&D plans of the group for the second half of 2013 include: certification of OPTIMA-24 switchgear; development of documentation of the D-12-2S switchgear for degree of protection IP43, supplementary testing; development of documentation of the D-17P switchgear with short-circuit current 50kA.3s; development of documentation of low voltage switchgear with withdrawable parts; development works on starting the production of silicon products. 11. STATEMENT ON CHOICE OF AN AUDITOR The Management Board of ELEKTROBUDOWA SA confirms that Deloitte Polska Spółka z ograniczoną odpowiedzialnością sp. k. having its registered office at 19, Jana Pawła Str Warsaw was chosen to audit the 2013 consolidated financial statements of the ELEKTROBUDOWA SA group and to review the interim consolidated financial statements in conformity with law provisions. The audit company and chartered accountants who reviewed the statements fulfilled the conditions 38

40 of expressing an unbiased and independent opinion of the audit, conformable with relevant regulations. Information on the contract concluded with the auditor A contract for reviewing the interim financial statements of ELEKTROBUDOWA SA and the ELEKTROBUDOWA SA group for the period and for auditing the 2013 annual Financial Statements of ELEKTROBUDOWA SA and the 2012 annual Consolidated Financial Statements of the ELEKTROBUDOWA SA group was concluded on with Deloitte Polska Spółka z ograniczoną odpowiedzialnością sp. k. having their registered office in Warsaw. Deloitte Polska Spółka z ograniczoną odpowiedzialnością sp. k. has reviewed the interim financial statements and audited the financial statement of ELEKTROBUDOWA SA and the consolidated financial statement of the ELEKTROBUDOWA SA group for the fifth time in succession. The remuneration for the review and auditing of the above mentioned statements for 2013 was agreed as follows (in thousands of PLN): review of the half-year financial statements of ELEKTROBUDOWA SA and consolidated financial statements of the ELEKTROBUDOWA SA group audit of the annual financial statements of ELEKTROBUDOWA SA and consolidated financial statements of the ELEKTROBUDOWA SA group Total review and auditing the financial statements The remuneration is VAT excluded. Like in 2012, Deloitte Polska Spółka z ograniczoną odpowiedzialnością sp. k. was also commissioned to review the interim financial statements for the period and to audit the annual 2013 Financial Statements of ENERGOTEST sp. z o.o. The relevant contract was concluded on 26 May 2013 with the following agreed remuneration (in thousands of PLN): review of the half-year financial statements auditing the annual financial statements 8 8 Total review and auditing the financial statements The remuneration is VAT excluded. 39

41 12. SHAREHOLDERS OF THE PARENT ELEKTROBUDOWA SA To the best of their knowledge ELEKTROBUDOWA SA discloses a list of shareholders with qualifying holdings, indicating the number of shares held, their percentage in the share capital, number of voting rights attached to them with the percentage of the total vote in the general meeting: Shareholders as at 30 June 2013: Numbers of shares = number of votes % 1. AVIVA OFE AVIVA BZ WBK SA ING OFE (Open-end Pension Fund) Generali OFE AXA OFE Amplico OFE OFE PZU Złota Jesień PKO BP Bankowy PTE SA managing the OFE POLSAT and PKO OFE Free float Total number of shares in the share capital ELEKTROBUDOWA SA has not issued any securities with special controlling rights for their holders. No restrictions exist for exercising the voting right from the company s securities. No restrictions exist on transferring the right of ownership of ELEKTROBUDOWA s securities. Members of the Management Board of the parent did not hold any shares in ELEKTROBUDOWA SA as at 30 June As of 30 June 2013the key executives did not hold any shares in entities related to ELEKTROBUDOWA SA; the supervisory persons did not hold shares in ELEKTROBUDOWA SA or its related companies. 13 INFORMATION ABOUT THE MANAGEMENT BOARD AND THE SUPERVISORY BOARD OF THE PARENT 13.1 The Management Board of the parent The Management Board consists of 3 to 7 people appointed by the Supervisory Board for a joint threeyear term of office. The rules of appointing and dismissal of the managing persons have not changed. President is appointed by the Supervisory Board. Members of the Board are appointed by the Supervisory Board on President s motion. 40

42 Composition of the Management Board of ELEKTROBUDOWA SA in H1 2013: Jacek Faltynowicz - President Jarosław Tomaszewski - Board Member Ariusz Bober - Board Member Tomasz Jaźwiński - Board Member Janusz Juszczyk - Board Member Arkadiusz Klimowicz - Board Member Regulations for the Management Board activity are defined in the Articles and the By-Laws of the Management Board approved by the Supervisory Board. The Management Board shall manage the affairs of the company and represents the company. The Management Board holds meetings presided by its President. President of the Management Board is also Director of the company. Resolutions of the Management Board are adopted by absolute majority of votes. In case of equal number of votes President of the Management Board has got a casting vote. All matters that are not reserved for General Meeting or the Supervisory Board fall within the competence of the Management Board. Two members of the Management Board acting jointly or one member of the Management Board acting jointly with a proxy are authorized to represent the company. The Management Board may grant a proxy with prior consent of the Supervisory Board. Proxies acting independently within their authorizations may be appointed for performing actions of specific character or kind. The Management Board Members remuneration policy are presented in Note 43 of the consolidated financial statements for H The Supervisory Board of the Parent The Supervisory Board is composed of 5 to 7 members appointed by General Meeting of Shareholders for a joint three years term of office. The present Board consists of 7 members. Composition of the Supervisory Board of ELEKTROBUDOWA SA in H1 2013: Dariusz Mańko - Chairman Karol śbikowski - Vice-Chairman Agnieszka Godlewska - Member Eryk Karski - Member Tomasz Mosiek - Member Ryszard Rafalski - Member Paweł Tarnowski - Member All members of the Supervisory Board made representations that they are independent members. 41

43 The Supervisory Board acts on the basis of the Articles and its By-Laws approved by the Supervisory Board. Resolutions of the Supervisory Board are adopted by absolute majority of votes. In case of equal number of votes Chairman of the Supervisory Board has got a casting vote. The Supervisory Board Members remuneration policy and rules are presented in Note 43 of the consolidated financial statements for H The Audit Committee and the Nominating and Remuneration Committee of the parent The Supervisory Board appoints permanent committees, its advising and opinion-making bodies, from among its members. Two committees were operating in the Supervisory Board of ELEKTROBUDOWA SA in H1 2013: the Audit Committee and Nominating and Remuneration Committee. Operations of the Committees are based on Regulations, annexed to the By-Laws of the Supervisory Board. Operations of a Committee are supervised by its Chairperson. The chairperson supervises preparation of agendas, distribution of documents and writing minutes of meetings, using the company s resources for these purposes. Manner of convening the Committees meetings and adopting resolutions is governed by relevant rules for manners of convening meetings and adopting resolutions by the Supervisory Board The Audit Committee of the Parent From among its members the Supervisory Board appoints an Audit Committee, composed of at least three members, of whom at least one shall be independent of the company and entities significantly related to the company and be competent in finances and accounting. As at 30 June 2013 the Audit Committee worked in the following composition: Tomasz Mosiek Chairman of the Committee, Eryk Karski Member, Paweł Tarnowski Member The Nominating and Remuneration Committee of the parent The Nominating and Remuneration Committee is composed of at least two members. The Committee appoints its Chairperson out of its members. As at 30 June 2013 the Nominating and Remuneration Committee composed of: Ryszard Rafalski Chairman of the Committee, Agnieszka Godlewska Member, Karol śbikowski Member. 42

44 14 STATEMENT ON OBSERVING THE CORPORATE GOVERNANCE RULES BY THE PARENT The Management Board of ELEKTROBUDOWA SA declares that in the first half of 2013 the company and its bodies fully observed the corporate governance rules contained in the document Code of Best Practice for WSE Listed Companies. Details of corporate governance rules are available on the web page of ELEKTROBUDOWA SA: The company does not implement the corporate governance practices which are not required by the Polish law. Last year the company applied all provisions covered in the corporate governance rules. 15. SIGNIFICANT EVENTS CONCERNING PRIOR YEARS, RECOGNISED IN THE FINANCIAL STATEMENTS FOR THE CURRENT PERIOD The Management Board of the parent, ELEKTROBUDOWA SA, during business review of the Industry Division carried out in the first half of 2013 revealed irregularities in respect of assignment of direct costs to relevant contracts. This concerned principally the services invoiced by subcontractors for the General Realization of Investments, located in Gdańsk unit of the Industry Division. Findings of the detailed inspection of source documents of the selected projects performed by the GRI (invoices, acceptance reports, orders, purchase orders, contracts) showed that: - source documents invoices, acceptance reports are correct, both formally and arithmetically; - the invoices and acceptance reports comply substantially with the concluded contracts, orders, purchase orders; - the invoices are correctly recorded on the prime costs accounts; - there are irregularities in assigning the performed works to specific contract numbers (incorrect assignment of cost generating units). In consequence of wrong assignment of direct costs to active contracts during 2011 and 2012 the construction contracts were incorrectly valued as at the balance sheet date and the expected losses connected with performance of services pertaining to those contracts were not considered in the relevant reporting periods. The analysis covered all major and most important projects in progress as at 31 December Basing on deep analysis of source documents recorded by the GRI, the Management Board estimated the ultimate impact of the revealed irregularities on the balance sheet total and the profit and loss recognized in 2011 and 2012, and corrected the prior years profit and loss in the books of 2013 according to the current relevant regulations. The correction that were made had the following consequences: reduction of the net financial result for 2011 by the amount of thousand PLN, due to: change in valuation of provisions for long-term contracts reducing of Amounts due from contractors for construction contract works by thousand PLN, 43

45 creation of provisions for expected losses relating to the services performer under contracts - increase in Accruals presented in liabilities of the balance sheet in the amount of thousand PLN, increase in value of Deferred income tax assets on the corrections made, by the amount of thousand PLN. reduction of the net financial result for 2012 by the amount of thousand PLN, due to: change in valuation of provisions for long-term contracts reducing of Amounts due from contractors for construction contract works by thousand PLN, creation of provisions for expected losses relating to the services performer under contracts - increase in Accruals presented in liabilities of the balance sheet in the amount of thousand PLN, increase in value of Deferred income tax assets on the corrections made, by the amount of thousand PLN. total reduction of the net financial result for 2011 and 2012 by the amount of thousand PLN in result of: change in valuation of provisions for long-term contracts reducing of Amounts due from contractors for construction contract works by thousand PLN, creation of provisions for expected losses relating to the services performer under contracts - increase in Accruals presented in liabilities of the balance sheet in the amount of thousand PLN, increase in value of Deferred income tax assets on the corrections made, by the amount of thousand PLN. The corrections of errors were recognized the statement of financial position as at 30 June 2013 in equity in the retained earnings item, as the prior years losses. Also, the 2012 opening balance and the 2013 opening balance were adjusted. In result of the adjustments the following statements were changed: the statement of financial positions, the statement of comprehensive income, the statement of changes in equity and the statement of cash flow. Impact of the corrections on the items of statements for comparable periods was presented in detail in the tables below. ELEKTROBUDOWA SA intends to have preliminary investigations conducted by independent specialists, with the purpose of preparing a written report of verification of correctness of the long-term contracts. The report will cover the analysis of valuation of long-term contracts performed by the Industry Division in the period from 2009 to 2013 in order to identify the irregularities and mechanisms that allowed them to occur. The analysis will be extended to cover some selected long-term contracts carried out by the other business segments of ELEKTROBUDOWA SA the Power Generation Division and the Power Distribution Division in order to detect any possible irregularities in valuation of the contracts. The report would recommend further actions, including possible amendment of the internal control procedure in force in the company, in respect of any identified loopholes or weaknesses of the system. 44

46 16. SIGNIFICANT EVENTS AFTER THE BALANCE SHEET DATE On 1 July 2013 Mr Tomasz Jaźwiński submitted his resignation as the Management Board member and Director of the Industry Division of the parent, ELEKTROBUDOWA SA. By resolution no. 39/VIII/2013 of 1 July 2013 the Supervisory Board of ELEKTROBUDOWA SA appointed Mr Sławomir Wołek as a member of the Management Board. As of 1 July 2013 Mr Sławomir Wołek also took up the position of Director of the Industry Division. On 1 July 2013 the parent, ELEKTROBUDOWA SA together with the Consortium Partners: QUMAK SEKOM S.A. and Przedsiębiorstwo AGAT S.A., filed an application to the District Court for the capital city of Warsaw to summon to a conciliation hearing: the State Treasury Minister of Sport and Tourism, HYDROBUDOWA S.A. - the company in liquidation bankruptcy, ALPINE Construction Polska Sp. z o.o., ALPINE Bau Deutschland AG, ALPINE Bau GmbH, PBG S.A. the company in arrangement bankruptcy, for joint and several payment of the amount thousand PLN. The amount consists of: - incurred by the consortium partners, as a subcontractor, expenses of extension of the period of construction works relating to the building of the National Stadium in Warsaw. Rescheduling of milestones was caused by defects in the execution design but also was due to the fact that Investor organized events in the Stadium while the construction works had not been yet completed. Extension of period of project realization was agreed by Investor with the General Contractor who agreed to pay the amounts equivalent to additional costs of the works performed on the site; - demand for payment of compensation for costs incurred by the consortium partners, as repayment of unjust enrichment and as reimbursement of expenses and expenditure of works carried out without a received order; At the same time, in the application filed in the District Court for the capital city of Warsaw the 8th Commercial Department, ELEKTROBUDOWA SA and the Consortium Partners also summoned the above opponents to voluntary payment of thousand PLN within 14 days since the application was delivered to the above opponents by the court competent for the subject of dispute, or to submittal of a proposal of a voluntary settlement of the dispute. As at 30 August 2013 the court did not deliver the application to the opponents, so the 14-day period did not start yet. Currently, a petition to the court is being prepared by the consortium of ELEKTROBUDOWA SA, QUMAK SEKOM S.A. and Przedsiębiorstwo AGAT S.A. against the State Treasury represented by Narodowe Centrum Sportu Sp. z o.o. for payment of all receivables due from the contract, including the interest for delay in payment. On 2 July 2013 Member of the Management Board Financial Director of the parent, Mr Jarosław Tomaszewski handed in his resignation to the Chairman of the Supervisory Board of ELEKTROBUDOWA SA effective as of 31 December Until that date Mr Jarosław Tomaszewski will remain in the composition of the Management Board and will continue to perform his duties of Financial Director and Board Member. 45

47 On 8 August 2013 the Russian Ministry of Finance Federal Tax Service, the Office for Sankt Petersburg issued a notice of removing a Russian entity, the limited liability company KRUELTA from the records kept by the taxation body, following the information about the cease of activity by a legal entity announced by the Russian State Register of Legal Entities, excerpt no of 8 August The notice issued by the Taxation Office of the Russian Federation ended the procedure of winding up KRUELTA Ltd. having its registered office at 17a, Magnitogorskaya Street, Sankt Petersburg. ELEKTROBUDOWA SA held an interest equal to 49% of KRUELTA s share capital, which purchase value was thousand PLN. 17. STATEMENT OF CONFORMITY WITH LEGISLATION The financial statements of the group were prepared according to the International Financial Reporting Standards as adopted by the European Union. The Management Board of ELEKTROBUDOWA declares that all information required by the Regulation of the Minister of Finance dated 19 February 2009 on current and interim information provided by issuers of securities and with the conditions of acknowledging the equivalence of information required by laws of a non-member country were included in the group s Financial Statements, except those which do not apply to the group. 46